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Corporate tax in the UAE: How is it calculated?

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During the past few years, the UAE has experienced significant tax changes aimed at bringing its tax system in line with international best practices and diversifying its state revenue. As a result, when it comes to the calculation of the tax payable, not all businesses experience the same thing. Many business entities in the UAE still stumble in calculating corporate tax. But in order to prepare for the UAE corporate tax regime, it is crucial to learn how to calculate the amount of corporate tax. To ensure efficiency and accuracy in the calculation, it is advisable to seek professional help from top accounting firms in the UAE. Tax consultants in the UAE can provide any guidance your business may need on all prospects of corporate tax.

UAE corporate tax in a bird’s eye view

Corporate tax is a form of direct tax imposed on corporations and other business entities' profits or net income. There are also jurisdictions in which Corporate Tax is referred to as "Corporate Income Tax (CIT)" or "Business Profits Tax".

The UAE has undergone a series of tax reforms in the last few years in order to align itself with international markets and diversify its revenue, starting with the introduction of Value Added Tax (VAT) in January 2018, followed by the introduction of ESRs in April 2019 and Country-by-Country Reporting (CbCR) regulations in April 2019. On 31 January 2022, the tax landscape shifted once again. The Ministry of Finance (MoF) of the United Arab Emirates (UAE) announced that a new federal corporate tax (CT) system would be implemented in the UAE with financial years starting on or after 1 June 2023. The UAE introduced a standard 9% corporate income tax rate, which is the lowest within the GCC region, barring Bahrain.

A certain level of complexity exists in the UAE corporate tax regime, which is unavoidable, in a diversified economy like the UAE. However, the UAE government has taken steps to keep the UAE corporate tax regime as simple as possible, which may help businesses reduce compliance costs. Herewith, the UAE corporate tax regime will provide relief for small businesses by simplifying financial and tax reporting duties. Providing small business relief is important since tax compliance is disproportionately burdensome for small and medium-sized businesses worldwide.

How to calculate the payable corporate tax?

Businesses should be aware of the various segments of corporate tax to determine the tax amount they are liable to pay to the government. In order to determine the amount of tax payable, the following factors must be considered:

The UAE levies on the annual taxable income of a business
The corporate tax amount will be 0% for taxable income not exceeding AED 375,000 and 9% for taxable income exceeding AED 375,000
Calculation of taxable income should be based on the accounting net profit (or loss) in the financial statement

In a nutshell, corporate tax is calculated at 9% of the net profit shown in the financial statements of the business and is determined after all applicable deductions. Any foreign taxes paid will also be entitled to a reduction from the profit shown in the financial statement. The net profit derived after all deductions are viewed as taxable income.

Dividend income earned by UAE Company from its qualifying shareholdings (to be defined in the law), capital gains, profits from group reorganization and intra-group transactions shall be in general exempt from Income Tax. Domestic and cross-border payments will not be subject to UAE withholding tax.

Foreign Tax Credits

Corporate tax in the UAE applies to the worldwide income of UAE resident companies including income from foreign sources that may have previously been taxed by a government in a manner similar to corporate tax in the UAE. In order to prevent double taxation, taxes paid in a foreign jurisdiction will be credited against UAE corporate tax liabilities on foreign-sourced income that has not been otherwise exempted. It is referred to as the "Foreign Tax Credit".

Why get it done with an expert?

Most firms in the UAE end up calculating taxes in hassle finding it difficult to put aside the time to do this. Remember, it takes a bit of time and effort to ensure that your corporate tax is calculated precisely. As it is a complex procedure that is needed to be done without any mistakes, it can’t be done hastily. Yes, it is way more than crunching numbers! Hiring a professional tax consultant will get the work done efficiently, thereby giving you the time to focus on your business.

If you are struggling with calculating your tax in the hustle and bustle of your daily business, and are on the lookout for a tax advisor in the UAE, Alchemist is a name you can trust. Alchemist, with more than 5 years in the business with over 1,000 clients across GCC, has expert teams of Chartered Accountants, and Management Accountants who can help you with every financial aspect of the business, including but not limited to tax consultancy services, audit & assurance, outsourced accounting, ERP consulting, and bookkeeping. Being one of the best auditing firms in the UAE, Alchemist offers all the financial advice and services, tailored to suit your business needs.

Be it calculating corporate tax or filing your taxes, getting it done with a professional touch will not only ensure corporate tax compliance but will also help you to prevent relevant penalties, thereby assuring efficiency in your business. It doesn't matter whether you run a start-up or a multinational company, Alchemist offers personalized and tailored financial services to suit your needs thereby helping you to pay tax efficiently without hassle.